I thought I’d sum up the basics of penny stocks in one simple post that anyone can read and immediately gain a good foundation of what penny stocks are and some of the better ways to find profitable ones. The fact that you are reading a penny stocks for dummies article makes you not a dummy. Information is how anyone succeeds, and penny stocks are no different. It’s a smart thing to have a good understanding of penny stock investing and performing adequate research before even thinking about buying penny stocks. Bear in mind that each of following categories can certainly (and should) be looked into with much greater detail but this should get you started.
Penny Stock Basics
A penny stock has many definitions. For those who only trade on the large stock exchanges a penny stock is any stock that is less than $5 per share. The other definitions are generally based on market value. The market value is the number of shares multiplied by the price per share. Penny stocks are usually stocks with a market value less than $200 million (this number can vary.) The most obvious definition is any stock with a price less than $1 per share. The last definition you may see is any stock that is traded OTC (over the counter) or on the pink sheets.
Regardless of your definition the point of penny stocks is your trading lower valued companies that have less information because the company isn’t required to have independently audited information and is never covered by a stock market analyst because virtually no one would read about it or pay for the information.
When choosing to trade penny stocks any broker is required to show you information on the risks of trading penny stocks. Because of the risk not all brokers even offer penny stocks as a choice so make sure you ask.
Penny Stock Risks
Without a doubt, the penny stock carries more risk than the average stock. The primary reason for this is the low value of the company makes the price easy to manipulate by wealthy individuals or small groups of people. A 100 billion dollar company can’t easily be manipulated by any individual person. A $50 million dollar company can have 20% of the whole company traded by thousands of different individuals or small trading groups. Surges in buying and selling activity can manipulate the value of the company on the short term causing inexperienced traders and investors to change their buying and selling activities. This is shady at best. Worse still, other people move beyond shady and into scams.
Penny Stock Scams
There are two primary penny stock scams that focus on the inexperienced traders and investors. For the traders the biggest risk is the pump and dump. Here an advertising campaign will get a certain penny stock very hot by getting people who aren’t even into penny stocks, buying them. Then this will trigger your trading signals which under natural conditions would make a great trade. The scammers then dump all of their stock quickly into the buying spree. Once the marketing campaign is over and the scammers made their money, they are out and the price collapses.
Penny Stock Trading and Investing
In general when penny stock trading you’ll often do better with short term trading rather than holding stocks for years. This is because the longer your trade is the more risk you apply to your trade with scammers coming in or companies having negative information released. When penny stock investing you’ll also do best if your good at getting information no one else has. This is usually done by talking with people who work at these small companies to see how viable the company truly is. Those who are willing to go deeper than the information available on the internet can really win huge with penny stock investing.
Lastly, traditional technical analysis (i.e analyzing stock charts) and fundamental analysis (analyzing the financials) can both help narrow down a profitable penny stock from a dud so don’t underestimate these traditional yet effective stock screening methods. Hopefully this provides a good “penny stocks for beginners” overview but don’t stop there; educate yourself further by reading my other posts and even consider subscribing to a reputable penny stock newsletter. The more informed you are with proven penny stock strategies and solid investing advice, the better your outcome.
Knowing what are the best penny stocks to buy at any given time is not always easy to say the least. In fact there is no sure fire way to pick the right stocks at the right time all the time. If there were, we’d all be rich, but the truth is choosing the top penny stocks to buy is more of a best guess rather than a solid formula.
Having said that however, don’t let this deter you as there are a number of indicators you can factor in when looking for hot penny stocks which can significantly increase your rate of picking profitable penny stocks versus losing ones. You should never just use one indicator when picking stocks however. All indicators should be looked at together as a whole to more accurately analyze a penny stock’s potential. The following are some indicators to consider when penny stock investing:
Strong Price Movement – If a stock has large percentage price gains with heavy transactional volume over the course of a number of days, this could be an indicator that the stock is starting to trend up and build momentum.
ROE (Return On Equity) – ROE, often considered the most important ratio in stock analysis is essentially the quantity of net income returned as a percentage of shareholders equity (SE). It’s calculated by dividing the net income by shareholders equity. Penny stocks with a positive ROE no matter how small indicates the company has value and is turning a profit. In other words it’s a sign of quality.
Technical Analysis Indicators – Technical Analysis is a way to predict a stock’s future performance based on past performance. One of the most important indicators is the MACD (Moving Average Convergence / Divergence) ratio. The MACD ratio measures whether a stock is trending up or down. The idea is that if a stock is trending up it has a tendency to continue that trend until of course the trend starts to change (which the MACD can also indicate). The most common parameters used in the MACD ratio are (12,26,9). Another popular indicator are moving averages, particularly the 50 day and 200 day moving averages. It is believed that if the stock is above the 50 day, it’s a positive sign and if the 50 day is above the 200 day, even more so.
Insider Buying – When company insiders are buying their own company’s stock, it’s a very positive indicator. The reason is quite simple. They believe in their company and the future growth of the stock; why else would they be buying? And who knows the true financial condition of a company better than those running it? Enough said.
These indicators will go a long way in helping you find the very best penny stocks to buy with the highest growth potential. Here’s to your financial success.
With an interest in buying penny stocks, you almost certainly would have heard the term “pink sheets” or just “pinks” at least once. The term “pink sheets” actually comes from the color of paper the stock quotes were originally printed on but now it refers to the electronic quotation system used for a variety of OTC securities.
Pink sheets penny stocks are essentially stocks with a price below $5.00 that trade on the Pink Sheets electronic quotation service. But what exactly is the pink sheets and how does it differ from the OTCBB and major markets like the NASDAQ and NYSE?
An important point to note about the pink sheets is that it is not a registered stock exchange but a computerized quotation system and the stocks that are listed on the pink sheets are generally stocks that could not meet the specific requirements of a major stock exchange. Furthermore, unlike stock exchanges the pink sheets are not regulated by the Securities and Exchange Commission (SEC). As such there are virtually no requirements for historical or even current financial data though companies issuing stock on the Pink Sheets are at least bound by both federal and state security laws.
Obviously due to the lack of regulation, the pink sheets can be a dangerous place to buy penny stocks. Therefore, you really need to perform your due diligence on any potential company your interested buying stock in. Companies can vanish with out a trace from the pink sheets along with your hard earned cash. Due to these factors in addition to the extreme volatility and unpredictability of pink sheets penny stocks, it’s highly recommended that an investor stick to trading with money he can afford to lose and no more than 10% of of his portfolio.
Having said all this, by exercising both caution and experience and by implementing specific stock strategies, a lot of money can be made in the pink sheets. Why? Simply, pink sheets stocks can double or triple in price very easily. A 5 cent share for example can quite easily become a 10 cent or 25 cent share in a matter of weeks, leaving a 100% or 400% gain respectfully. Seeing that the average stock goes up a measly 6% per year, it’s very easy to see the lure of penny stock investing.
Whether you decide to buy penny stocks on the pink sheets or on the OTCBB, by being very selective in the stocks you choose in addition to using various proven stock strategies to limit your risk, this portion of your overall portfolio can very easily become your most profitable one.
